Sadiq Adatia, chief investment officer at Sun Life Global Investments is out with his annual forecast. We’re in for quite a year.
The U.S. Federal Reserve’s decision to wind down its US$85 billion-a-month bond-buying program will have implications for investors around the world, and will be this year’s most important economic story. That’s according to Sadiq Adatia, chief investment officer at Sun Life Global Investments.
“The tapering will be done by the end of the year,” he told me in an interview this week. “If the Fed moves faster than expected, it could take a bigger toll on the bond market. I think it’s going to be a slow-moving yield environment where yields go up, but not necessarily as steeply as people might have expected.”
In his market update, Adatia touches on several other stories Canadians will have to pay careful attention to this year. Domestically, he has his eye on real estate, household debt and unemployment. “If housing continues to have a tougher time, that’s going to put even more pressure on the employment side of things and on the debt level,” he said. “If people start to lose jobs, the amount of debt they’re carrying is going to be an even bigger burden on them than it is today.”
Adatia is calling for a correction in housing prices — in the neighborhood of 10% to 15% nationally — over the next two years. (Something he describes as a “soft landing,” by the way.) He doesn’t expect mortgage rates to rise in 2014, but Adatia does believe demand will weaken. “I don’t see growth this year, I see a slight decline,” he said. “And then more of a decline the year after.”
Five other stories to watch:
- The Bank of Canada will sit tight on its target for the overnight rate, currently set at 1%. “I don’t see a move on the overnight rate until at least 2015, if not longer,” said Adatia.
- The Canadian dollar will spend much of the year in the 85₵ to 90₵ range. We’re no longer a safe haven in the minds of global investors, in part because of our high household debt levels and perceptions of overheated residential real estate prices in key markets. “If real estate falls more quickly in 2014, then we could see even more pressure,” he said.
- The U.S. economy will perform well. Equities could rise by 7% to 10% this year. “When we look at valuations, we think they’re reasonable,” Adatia said. “We see a growing dividend environment. We think the consumer has got himself into pretty good shape from a deleveraging perspective.” By contrast, look for Canadian equities to end the year flat or even in negative territory.
- Emerging market equities could produce double-digit returns. “We still believe in the growth in emerging markets,” he said. “Valuations look attractive from a historical standpoint and a relative standpoint. Last year, the U.S. market significantly outperformed the emerging markets. We think emerging markets will play catch up over the next few years.”
- Europe may finally be coming back. “I’m feeling a little bit more comfortable about Europe, and in particular the eurozone,” said Adatia. “Unemployment, though quite high, has stabilized … Competitiveness has improved. There are a lot of good reasons why the eurozone can actually do okay in the coming years. It is starting to turn the corner.”
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